EUR/GBP week 46

The Bank of England left its Bank Rate at a record low of 0.1% on November 5th 2020 and increased the size of its bond-buying program by a larger-than-expected £150 billion to £875 billion, as the country entered a new coronavirus lockdown. Policymakers noted that there has been a rapid rise in rates of Covid infection and the UK Government has responded by increasing the severity of Covid restrictions. Also, consumer spending has softened across a range of high-frequency indicators, while investment intentions have remained weak. The central bank sees the economy shrinking by 11% in Q4 2020, much worse than a 5.4% drop projected in August and to grow by a stronger 11% in Q4 2021. Inflation is expected higher at 0.6% in Q4 2020 (vs 0.3% in August) and the unemployment rate is seen lower at 6.3% (vs 7.5%). The key bank rate is expected to remain steady at 0.1% through the rest of 2020 but is likely to be cut to -0.1% next year. 

Sterling hit its highest level in more than two months versus the euro on Wednesday as investors were optimistic that a vaccine against COVID-19 would provide a lifeline to the UK economy and more hopeful about the chances of a Brexit deal.

The pound benefited as investors judged that a possible vaccine would be a particular boon to the UK, which has seen its economy ravaged by the coronavirus.

Pound-traders had feared that the economic fallout from a second nationwide lockdown, combined with the possibility of Britain and the European Union failing to agree on a post-Brexit trade deal, could push the Bank of England to introduce negative rates in January.

The euro, it was up around 0.2% at 88.785 pence per euro, having also touched its highest since early September.

Hardy said that if there is a Brexit breakthrough and Covid-19 vaccine hopes are sustained, then euro-sterling could head towards 0.86.

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